It is no surprise to anyone in the business of secured lending that valuation matters.  It is worth noting, however, that collateral valuation may be outcome-determinative in litigation over a plan of reorganization in bankruptcy.  Although valuation was not the central focus of the Fifth Circuit’s recent decision in Western Real Estate Equities, L.L.C. v. Village at Camp Bowie I, L.P. (Matter of Village at Camp Bowie I, L.P.), No. 12-10271, 2013 U.S. App. LEXIS 3949 (5th Cir. Feb.

In AMR Corporation, et al., Debtors, Case No. 12-3967, 2013 WL 1339123 (S.D.N.Y. April 3, 2013), the United States District Court for the Southern District of New York acknowledged that to be granted relief from the automatic stay under 11 U.S.C. § 362(d), a secured creditor has the initial burden to show that there has been a decline—or at least a risk of decline—in the value of its collateral. Only then will the burden shift to the debtor to prove that the value of the collateral is not, in fact, declining.

Recently, the Fifth Circuit decided a case regarding the appropriate interest rate to be charged when a secured creditor's claim is "crammed down," pursuant to section 1129(b)(2)(A) of the United States Bankruptcy Code (Code), 11 U.S.C. §§ 101-1532. Unfortunately, the decision does little to clarify the confusion precipitated by the Supreme Court's 2004 decision of Till v. SCS Credit Corp., 541 U.S. 465 (2004), and perhaps even adds to it.

The U.S. Court of Appeals for the Fifth Circuit held on March 1, 2013, that a bankruptcy court had not erred in applying a prime plus 1.75 percent interest rate to a secured lender’s $39 million claim under a "cramdown" plan of reorganization. Wells Fargo Bank N.A v. Texas Grand Prairie Hotel Realty, LLC (In the Matter of Texas Grand Prairie Hotel Realty, LLC), __ F.3d __, 2013 WL 776317 (5th Cir. Mar. 1, 2013).

Those who practice in the secured transactions arena, and our clients, understand the importance of filing financing statements and continuing them on a regular basis. Failure to maintain perfection of a security interest can be disastrous to a secured lender in the case of a bankruptcy case involving its borrower. Financing statements can, however, sometimes be mistakenly terminated. Two recent cases illustrate the issues which may arise when a financing statement is inadvertently terminated.

Large businesses and organizations that self-insure their legally mandated insurance requirements often use “fronting” policies in which the policyholder must reimburse insurers for all losses and expenses paid on the policyholder’s behalf. These policyholders must furnish substantial collateral to secure repayment, typically, enough to pay many years’ worth of actual and anticipated claims. This can amount to hundreds of millions of dollars, and typically exacerbates cash flow and balance sheet problems for policyholders under financial stress.

FCStone, a New York-based commodities brokerage firm, was recently ordered to return a transfer of $15.6 million to the bankruptcy estate of Sentinel Management Group. Approximately $1.1 million of this amount constituted a prepetition transfer of proceeds the debtor obtained from the sale of securities, which proceeds the debtor distributed to a certain segment of its customers, including FCStone.

In re Geijsel, et al., Case No. 10-43979-11 (Bankr. N.D. Texas, Aug. 24, 2012)

CASE SNAPSHOT

In re Premier Golf Properties, L.P., BAP No. SC- 11-1508-HPaJu (9th Cir. BAP, Aug. 13, 2012)

CASE SNAPSHOT

The Ninth Circuit B.A.P. affirmed the bankruptcy court decision that post-petition income from greens fees and driving range fees were not “rents, proceeds, or profits” of the secured lender’s pre-petition blanket security interest on all real and personal property (and “all proceeds thereof”) within the meaning of section 552(b), and thus were not cash collateral.

On January 7, 2013, the Judge Robert D. Drain of the United States Bankruptcy Court for the Southern District of New York held that a dispute concerning the debtors’ use of cash collateral was not subject to arbitration, notwithstanding a broad arbitration clause in the parties’ underlying agreement, because the decision to allow a debtor to use cash collateral constituted a “core” issue and was a fundamental aspect of the bankruptcy process. In re Hostess Brands, Inc., No. 12-22052 (RDD), 2013 WL 82914 (Bankr. S.D.N.Y. Jan. 7, 2013).

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